Hospital bond issues appear to be regaining momentum after a slow start to the year. Underwriters saw reason for optimism early last week as two new issues prepared to go to market.
Mount Sinai-New York University Medical Center in New York was to issue $560 million of tax-exempt fixed-rate bonds to refinance debt, fund new renovation projects and cover previous capital expenditures. Goldman Sachs & Co. is lead underwriter.
Meanwhile, Fairview Health Services in Minneapolis scheduled approximately $176 million in new debt to expand capacity at two of its seven hospitals, replace one hospital and refund debt.
A receptive market for those deals could encourage others, says Michael Irwin, managing director at Salomon Smith Barney, lead underwriter for the Fairview transaction.
"The improvement in the market as the (first) quarter progressed portends well, and we see our calendar building a little bit," Irwin says. "(Investors) are moving out of the stock market, and some of that is moving into the municipal market."
Hospitals are also enjoying a break on interest rates, which have fallen by about 35 basis points for fixed-rate issues since mid-February.
For the quarter ended March 31, 56 tax-exempt issues were made totaling $2.52 billion, compared with 111 tax-exempt issues worth $5.09 billion in the first quarter of 1999, according to Newark, N.J.-based Thomson Financial Securities Data.
Five taxable issues totaled $98.7 million in the quarter, down from nine taxable issues worth $105 million in the year-ago period.
Paul Young, managing director of Morgan Keegan & Co., based in Memphis, Tenn., attributed a sleepy first quarter to a variety of factors, including Y2K and uncertainty about the direction of interest rates.
"If you look at what's happened since the middle of March in terms of healthcare in particular, you'll see some pickup," says Young, whose firm was lead underwriter for two issues, both in mid-March: Good Shepherd Medical Center in Longview, Texas, which issued $75 million in bonds, and Washington Regional Medical Center in Fayetteville, Ark., which made an $85.2 million issue.
Denver-based Catholic Health Initiatives issued the most debt in the first quarter, with a combination of variable- and fixed-rate debt for facilities in nine states (See chart). CHI went to market for what its director of capital finance, Linda McDonald, describes as a routine financing, which the system conducts every 18 to 24 months. Proceeds mainly will refund general capital expenditures, such as medical equipment, with one significant new construction project: an expansion of inpatient beds at St. Vincent Infirmary Medical Center in Little Rock, Ark.
The No. 2 issuer was Mountain States Health Alliance in Johnson City, Tenn., which added $445 million of debt to free up cash and finance facility improvements (Feb. 21, p. 58).
Mayo Foundation issued $290 million worth of debt during the first quarter, including $200 million for its $300 million clinic expansion in Rochester, Minn., slated for completion in 2003.
The quarter saw some shifts in the nature of the deals. Fewer issuers of tax-exempt debt opted for fixed rates, which fell to 57.9% of the total principal from 86.7% in first-quarter 1999. Variable-rate debt increased to 40.6% from 11.9% of total debt.
Meanwhile, the percentage of tax-exempt bonds that were insured fell to 46% from 51%. The 18 insured issues totaled $1.2 billion, which is down from 37 insured issues worth $2.6 billion in the first quarter of 1999.
The number of issues backed by a letter of credit increased to 12 issues with total principal of $124.6 million from eight issues worth $98.5 million in the first quarter of 1999.
Investors continued to extract greater demands on healthcare issuers. For example, CHI for the first time agreed to provide quarterly disclosures of its financial results to investors, starting with its next fiscal year beginning July 1.
"We're a very strongly rated organization, but the market is in a little different spot than it was," when the system last issued bonds in 1998, McDonald says. CHI holds an above-average, Aa3 rating from Moody's Investors Service.
She says quarterly rather than annual reporting "will create some additional work, (but) we're happy to comply."